TopPicks from Gordon Reid, president and chief executive officer, Goodreid Investment Counsel
FOCUS: U.S. equities Banks are only viable institutions with the trust of their customers. By definition, banks rely on deposits to fund much of their business activity, such as commercial loans, mortgages and other debt offerings. Because they are vital to the economy, governments oversee and regulate banks rigorously. However, in this age of digital access, the concept of “a run on the bank” is quite different than it was 90 years ago at the start of the Great Depression.
Today, instant access allows depositors to withdraw funds anywhere, anytime. As we witnessed last weekend that changes things. Even with enhanced regulations, rigorous stress tests and reporting transparency, liquidity risks have risen. Without due recognition, the actions of the U.S. Treasury last weekend to de-facto guarantee deposits have changed the landscape dramatically.
Banking in the U.S. is quite different than in Canada. For starters, there are close to 5,000 banks in the U.S. compared to just 34 in Canada. Many U.S. banks are quite small, serving niche markets, from both a focus standpoint and geographically. Such is the case of Silicon Valley Bank , a bank with a largely one-dimensional funding source, tech companies and tech start-ups.
A brief explanation of what happened to SVB is in order. The history of central bank action is that inevitably something will break. Raising interest rates as aggressively as the U.S. Federal Reserve has done has left many portfolios with unrealized losses in their fixed-income holdings. This includes individual accounts, banks, insurance companies and government balance sheets. If these entities have enough in reserves, the losses do not need to be realized.
Exacerbating the problem, SVB’s management increased risk by allowing an asset and liability mismatch. Meaning bank assets, or bonds with longer duration suffering financially as rates rise, versus bank liabilities, or short-term rates on deposits becoming more costly as rates rise. The conclusion is a perfect storm for SVB but very unlikely to be a contagion event, in fact owning bank stocks may be safer than ever.
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